ATHENS — A team of
analysts from one of the main credit rating agencies smiled
condescendingly across a boardroom table one recent afternoon, when
asked about the likelihood of a Greek exit from the euro. It was
clear they dismissed the idea. There is virtually no chance of Greece
leaving the eurozone, they assured me.

This is not the
first time that credit rating agencies have fallen asleep at the
switch. Greece’s struggles to complete its first bailout review and
simultaneously manage the arrival of thousands of refugees on its
shores are likely to come to a head this summer. And you can bet
Grexit will be back on the table.

* * *

Almost exactly a
year after Syriza rocked the Greek political establishment by winning
the January 2015 general elections, international news outlets have
all but dropped the subject of Greece’s fiscal profligacy that so
dominated headlines in 2015. But this is unlikely to last. Greece’s
creditors are heading to Athens this week to discuss Greece’s first
review under the third bailout program.

As has been the case
many times before in Greece, this review should already have been
completed and the funds released.

The main sticking
point is pension reform. The third bailout program calls for pension
cost savings of 1 percent of GDP in 2016. The government has
implemented measures achieving two thirds of that the target so far,
leaving a gap of roughly €600 million.

Syriza’s plans to
make up the gap include higher contributions from farmers and the
self-employed, an unpopular proposal that has led to widespread
protests across the country. Considering that, according to the Small
Enterprises’ Institute, more than 50 percent of Greek households
relied on pensions as their main source of income in 2015, it’s no
wonder pension cuts are a particularly toxic issue in Greek politics.

Protests haven’t
seriously threatened government cohesion so far, but that could
change: With only a three-seat majority in parliament, the Tsipras
government has little room to maneuver. If the coalition loses its
majority, government cohesion will suffer significantly.

* * *

There are a number
of reasons why we can expect creditors to play hardball with Greece.
First of all, the risk of pushing the current government to the point
of collapse is no longer the deterrent it once was. Since the
beginning of the Greek bailouts in 2010, successive governments
argued the creditors were better off negotiating with them than with
an anti-bailout opposition party. This argument no longer holds true.

With Kyriakos
Mitsotakis newly elected at the helm of the opposition New Democracy,
there is now a viable alternative for a prime minister who is
relatively constructive on the bailout. Arguably, some creditors
might prefer to deal with Mitsotakis than with Tsipras.

Merkel
and Tsipras agreed that the only rational way forward was for Greece
to leave the eurozone. If they came to that conclusion once, it’s
possible they’ll come to it again.

Secondly, the IMF
has not yet decided if it will participate in the third bailout. It
has said it would only be willing to take part if Greece’s debt is
sustainable, which either entails debt relief or an even more painful
fiscal adjustment for Greece. So far the other creditors have shown
little appetite for debt relief. Eurogroup chief Jeroen Dijsselbloem
recently said the eurozone may be able to consider debt relief for
Greece in 10 or 15 years.

The IMF is therefore
likely to drive a very hard bargain on the fiscal adjustment Greece
must undergo. The IMF can rely on support from Germany in particular.
German Chancellor Angela Merkel has been insistent on IMF
participation in the third bailout to give her political cover with
the Bundestag.

Thirdly, Greece’s
debt crisis is only one of a number of crises that Europe currently
faces, among which the overwhelming influx of refugees, Britain’s
renegotiations on its position in the Union, and the ongoing
Ukrainian crisis loom large.

The Greek government
seems to think that this means Merkel, who has come under increasing
political pressure for her stance on refugees, will offer Greece
concessions to close the first review without too much trouble. But
given the toxic politics between the two countries, the opposite
seems more likely.

At one point during
the negotiations for the third bailout program, Merkel and Tsipras
agreed that the only rational way forward was for Greece to leave the
eurozone. If they came to that conclusion once, it’s possible
they’ll come to it again.

* * *

The hard deadline
for agreeing the first review and releasing funds for Greece is when
Greece runs out of money and cannot afford a debt repayment. This
will come in July, when Greece has over €3.5 billion in debt to
roll over.

But by late July,
Greece could be a fundamentally different country. The flow of
refugees from the Middle East slowed from over 200,000 in October
2015 to over 50,000 in January 2016 but is likely to pick up again as
the weather improves. Other EU countries have complained that Greece
is not following the rules on setting up hotspots and registering
refugees that come across the Aegean via raft from Turkey.

Tsipras
will have a hard time making concessions to the creditors while
keeping his government together in the face of rising euroskepticism.

The German
chancellor’s open-armed welcome to refugees arriving in Europe,
over 1 million of whom came to Germany, was called into question by
the mass sexual assault in Cologne on New Year’s Eve in which most
of the suspects were asylum seekers. With her popularity dwindling
and an upcoming general election in Germany in 2017, Merkel is
looking for ways to stem the flow of refugees.

Rather than
reintroducing Germany’s national borders, a more politically
appealing option for Merkel would be to outsource border closures to
Macedonia and Bulgaria, stranding a number of asylum seekers in
Greece.

Redrawing the
Schengen boundaries to exclude Greece would deal a major blow to the
country’s relations with the EU. If Greece fails to fulfill its
commitments to protect its borders and establish hotspots for
refugees, goodwill among creditors to find agreement on the bailout
negotiation in July will in short supply.

And among Greeks,
anti-EU sentiment is likely to grow as the country is forced to
handle the brunt of a refugee crisis not of its own making and
without sufficient financial and political support from the rest of
Europe. Tsipras will have a hard time making concessions to the
creditors while keeping his government together in the face of rising
euroskepticism.

German finance
minister Wolfgang Schäuble outlined the creditor’s attitude
towards Greece at the World Economic Forum in Davos when he glibly
told Tsipras, “It’s the implementation, stupid.” It seems
unlikely the creditors will be willing to cut Greece much slack in
this bailout review. Tsipras will have a hard time implementing what
is being asked of him without his government collapsing.

As Greece faces a
financing crunch in July, it will also likely see the influx of
refugees hit fever pitch. In the absence of a coherent and effective
European migration policy before July, it’s hard to imagine Greece
avoiding expulsion from Schengen — and with the new line for Europe
drawn at Greece’s northern borders, Greece will be one step closer
to being out of the European project.

Last summer,
Schäuble suggested Greece take a temporary break from the eurozone,
and relations between Germany and Greece have only deteriorated
since. It is likely Schäuble will put his proposal back on the table
this summer. Greece’s fate may ultimately be determined by how much
solidarity there really is in Europe — in which case, the future
looks grim.